Global Economic Prospects, 2005: Trade, Regionalism and Development Global Economic Prospects, 2005: Trade, Regionalism and Development December, 2004 Uri Dadush and Richard Newfarmer World Bank

Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point. Developing countries experience record growth in 2004, but will face less favorable macro conditions as the world economy slows in 2005 by around 1 percentage point. Downside risks could slow the global economy further. Downside risks could slow the global economy further. Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable. Many developing countries are well placed to absorb the slowdown and the risks, but poor oil importers and indebted middle-income countries are vulnerable. Global Outlook

Growth is projected to slow Real GDP, percent change Forecast Developing countries

Developing economies remain above trend Real GDP, percent change Developing countries Early 1980s debt crisis 1990s recession Transition countries East Asia financial crisis 2001 Global downturn

Strong performance of developing countries Real GDP per capita, percent growth Average growth

Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar. Developed-world debt and US current account deficit might trigger financial tensions, including higher interest rates and weakening dollar. Oil prices could rise further, instead of the moderation foreseen in the baseline Oil prices could rise further, instead of the moderation foreseen in the baseline A hard landing in China is still a possibility A hard landing in China is still a possibility Risks remain

Poor oil importers are immediately hit by high oil prices Poor oil importers are immediately hit by high oil prices Deviation from baseline in first year, per cent of GDP, with $10 higher oil price DomesticDemand CurrentAccountBalance

Impact of 200 basis point rise in long rates Impact of 200 basis point rise in long rates Deviation from baseline, percent of GDP

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Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. Regional trade agreements (RTAs) are proliferating and now cover one third of world trade, but their liberalizing effect has often been modest. RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. RTAs can create trade and bring many other benefits for development …but results are not automatic and depend critically on design and implementation. RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. RTAs have systemic consequences that adversely affect excluded countries, requiring international attention. Trade, Regionalism and Development: Key Messages

Regional Trade Agreements are proliferating… …and now potentially cover more than one-third of global trade Number of New Agreements Number of New Agreements Total in force Cumulative in force

South- South European Union US South- South European Union Percent of World Trade Covered Number of RTAs US Regional Trade Agreements are proliferating…

…but RTAs provide less new market access than it might appear Share of trade covered (%), 2003

…and in developing countries regional agreements are a relatively small driver of trade reform Share of tariff reductions Source: Martin and Ng, 2004 Av. Tariffs in Developing Countries

Drivers of autonomous liberalization Move to a market economy Move to a market economy Exhaustion of import-substitution strategy Exhaustion of import-substitution strategy Desire to use import competition to drive productivity and technological development Desire to use import competition to drive productivity and technological development Changing mindsets/New Leadership Changing mindsets/New Leadership ….the prior decision to integrate has been the key driver of all forms of liberalization and trade agreements play a secondary role.

Why the proliferation of RTAs? Secure access to markets, especially large markets Secure access to markets, especially large markets Locking-in reforms Locking-in reforms More FDI More FDI Among neighbors, lowering trade cost at border Among neighbors, lowering trade cost at border Framework for regional cooperation Framework for regional cooperation Developing countries High-income countries (US and EU) Grant trade access to support foreign policy goals, including development Grant trade access to support foreign policy goals, including development “Competitive liberalization” “Competitive liberalization” Access to services markets, protection of intellectual property, and rules for investment Access to services markets, protection of intellectual property, and rules for investment

Multilateral process essential.. but not sufficient Multilateral Process potentially the source of greatest gains in trade Multilateral Process potentially the source of greatest gains in trade The most credible forum to progress on agriculture and the only platform for building world trade rules The most credible forum to progress on agriculture and the only platform for building world trade rules …but widely viewed as too slow, unwieldy, and low-ambition to cater to complex regional policy objectives. …but widely viewed as too slow, unwieldy, and low-ambition to cater to complex regional policy objectives.

Estimated exponential impact on trade Intra-regional trade Overall exports Overall imports Note: The bars show the magnitude of the dummy variables capturing respectively the extent to which intraregional trade, overall imports and overall exports differ from the “normal” levels predicted by the gravity model on the basis of economic size, proximity and relevant institutional and historical variables, such as a common language. For members: Do RTAs create trade? …. Not automatically

Agreements with high external tariffs risk trade diversion Note: Tariffs are import-weighted at the country level to arrive at PTA averages Source: UN TRAINS, accessed through WITS Average weighted tariffs

East Asia has used MFN to integrate regionally E.Asia & Pacific Latin America M. East & N. Africa Europe & C. Asia S.Asia Sub- Sahara n Africa East Asia has led in global integration East Asia has led in global integration

East Asia Europe & Central Asia Central Asia Middle East & N. Africa South Asia Asia Sub- Saharan Africa East Asia has led in global integration East Asia has led in global integration …and in regional integration …and in regional integration LA East Asia has used MFN to integrate regionally

East Asia has led in global integration East Asia has led in global integration …and in regional integration …and in regional integration Despite having few RTAs Despite having few RTAs East Asia has used MFN to integrate regionally

East Asia has led in global integration East Asia has led in global integration …and in regional integration …and in regional integration Despite having few RTAs Despite having few RTAs But relying on low MFN trade barriers But relying on low MFN trade barriers MNA SAS SSA LAC ECA EAP Average external tariffs East Asia has used MFN to integrate regionally

Design Design  Large ex-post market  Low external tariff barriers  Nonrestrictive rules of origin  Wide product coverage with minimal exemptions  Liberalization of services  Facilitating trade at borders  Appropriate rules Implementation: Avoiding paper agreements Implementation: Avoiding paper agreements Design issues are crucial to achieving objectives Design issues are crucial to achieving objectives ….Open regionalism

Evaluating alternatives and South Asia’s systemic interests Evaluating alternatives and South Asia’s systemic interests Basic methodology is computer (CGE) simulations Allows simulation of relative price affects based upon demand and substitution consideration Allows simulation of relative price affects based upon demand and substitution consideration However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects However, outcomes are static, and do not account for productivity, technological change, and other dynamic effects Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation Moreover, simulations do not model services liberalization, trade facilitation and lowering of other trade costs, or capture non-trade benefits of regional cooperation

Evaluating alternatives: South Asia gains most from a multilateral agreement Change in South Asia’s real income in 2015 from baseline scenario (percent) Multilateral SAFTA (by itself) SAFTA (by itself) SAFTA (w/ other RTAs) Note: “SAFTA by itself” assumes that other major regions do not form trading blocs that would discriminate against South Asia. “SAFTA with other RTAs” assumes an RTA in East Asia, the FTAA in the Americas, and a Europe plus African RTA.

Preferences hurt excluded countries Change in real income in 2015 compared to baseline in percent Multilateral liberalization Individual RTA (average) (average) All countries sign RTAs Hub and spokes put weaker countries at disadvantage Systemic interests…avoiding discrimination and strengthening multilateral rules Note: “Individual RTA” assumes bilateral RTA with Quad, but no developing other country has. “All countries sign RTAs” assumes all have bilateral FTAs with Quad.

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Hub and spokes put weaker countries at disadvantage Multiple arrangements burden customs

Algeria Libya Morocco Mauritania Tunisia AMU Ghana Nigeria Cape Verde Gambia ECOWAS Benin Niger Togo Burkina Faso Cote d’Ivoire Conseil de L’Entente Guinea-Bissau Mali Senegal WAEMU Liberia Sierra Leaone Guinea Mano River Union CLISS Cameroon Central African Rep. Gabon Equat. Guinea Rep.Congo Chad Sao Tomé & Principe ECCAS CEMAC Angola Burundi* Rwanda* Egypt DR Congo Djibouti Ethiopia Eritrea Sudan Kenya* Uganda* Somalia Tanzania* EAC South Africa Botswana Lesotho Namibia* Swaziland* Mozambique SACU Malawi* Zambia* Zimbabwe* Mauritius* Syechelles* Comoros* Madagascar* Reunion IOC *CBI SADC COMESA Nile River Basin IGAD AMU: Arab Maghreb Union CBI: Cross Border Initiative CEMAC: Economic & Monetary Community of Central Africa CILSS: Permanent Interstate Committee on Drought Control in the Sahel COMESA: Common Market for Eastern and Southern Africa EAC: East African Cooperation ECOWAS: Economic Community of Western African Studies IGAD: Inter-Governmental Authority for Government IOC: Indian Ocean Commission SACU: Southern African Customs Union SADC: Southern African Development Community WAEMU: West African Economic & Monetary Union Overlapping African agreements…

Systemic issues…uneven and discriminatory access Preferences hurt excluded countries Disincentives to engage in multilateral liberalization Multiple arrangements burden customs Hub and spokes put weaker countries at disadvantage

International community through the WTO International community through the WTO  Get Doha done  Concentrate on transparency High income countries have systemic responsibility High income countries have systemic responsibility  Widen coverage in FTAs (i.e. agriculture)  Move toward conformity in rules of origin, and make less restrictive  Promote rules tailored to local capacities Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective Developing countries should adopt a 3 part strategy, using each instrument to its most appropriate objective  Unilateral: driving competitiveness and productivity  Multilateral: seeking broad market access  Regional: deep integration Promoting development requires using RTAs as part of global strategy for all…

South Asia has a special interest in strengthening the multilateral system South Asia has a special interest in strengthening the multilateral system Implications for South Asia’s trade strategy…  Its greatest gains are through access to world’s markets  RTA proliferation risks diminished access in other regions  Rules-based system essential for South Asia’s trade growth because its exports are sensitive South Asia has an interest in WTO disciplines on RTAs South Asia has an interest in WTO disciplines on RTAs  Get Doha Agenda done: lowers risk of trade diversion for memberslowers risk of trade diversion for members and minimizes effects on excluded countriesand minimizes effects on excluded countries A 3 pillar strategy for South Asia… A 3 pillar strategy for South Asia…  Unilateral: driving competitiveness  Multilateral: seeking broad market access  Regional: deep market access and institutional reforms (customs, ports, trade-related standards)

Global Economic Prospects, 2005: Trade, Regionalism and Development Global Economic Prospects, 2005: Trade, Regionalism and Development December, 2004 Uri Dadush and Richard Newfarmer World Bank